Question

In 2015, Bubble Inc. had net income of $500,000, assets of $5,000,000, sales of $2,000,000, and debt of 2,000,000. In 2016, Bubble Inc. had net income of $600,000, assets of $7,000,000, sales of $1,300,000, and debt of 2,000,000. Did BubbleInc’s return on assetsimprove from 2015 to 2016?

Answer 1

Answer:

No, Bubble Inc.'s ROA decreased in 2016

Explanation:

Given:

Net income in 2015 = $500,000

Assets in 2015 = $5,000,000

Return on assets (ROA) = Net income ÷ Assets

                                       = 500,000 ÷ 5,000,000

                                      = 0.1 or 10%

Net income in 2016 = $600,000

Assets in 2016 = $7,000,000

Return on assets (ROA) = Net income ÷ Assets

                                       = 600,000 ÷ 7,000,000

                                       = 0.086 or 8.6%

It can be seen that ROA has reduced to 8.6% in 2016 as compared to 10% in 2015. This is because incremental increase in net income is lower in 2016 as compared to incremental increase in assets.